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Economic Outlook

Economic Outlook. William Strauss Senior Economist and Economic Advisor Federal Reserve Bank of Chicago. Multi-Chamber Economic Outlook Luncheon Westmont, IL February 27, 2014. What I said last year about 2013. The outlook is for the U.S. economy to expand at a

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Economic Outlook

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  1. Economic Outlook • William Strauss • Senior Economist • and Economic Advisor • Federal Reserve Bank of Chicago Multi-Chamber Economic Outlook Luncheon Westmont, IL February 27, 2014

  2. What I said last year about 2013 • The outlook is for the U.S. economy to expand at a • pace around trend in 2013 • Employment is expected to rise moderately with the • unemployment rate edging lower • Slackness in the economy will lead to a relatively • contained inflation rate • Growth in manufacturing output should be around trend in 2013

  3. The “Great Recession” ended in June 2009 and GDP expanded by 2.7% in 2013

  4. A large share of the growth in Real GDPcame from an increase in inventories

  5. However, real final sales(GDP less change in private inventories)growth was far more restrained

  6. The liabilities side of the Fed’s balance sheetshows large amount of excess reserves

  7. Real existing home prices fell by 40%, but have begun to rise

  8. The forecast calls for a very gradual recovery in housing

  9. The stock market has improved since March 2009,and has exceeded its previous peak

  10. GDP is forecast to grow somewhatabove trend in 2014 and 2015

  11. The FOMC expects GDP to grow somewhatabove trend over the next three years FOMC Central Tendency (December 2013) 2014 2.8 – 3.2 2015 3.0 – 3.4 2016 2.5 – 3.2 Longer run 2.2 – 2.4

  12. The path of the current recovery is restrainedcompared with past deep recession recovery cycles average annualized growth: 5.0% average annualized growth: 4.6% average annualized growth: 2.4%

  13. Employment fell by over 8.7 million jobsbetween December 2007 and February 2010,since then it has added over 7.8 million jobs, with just over 2.2 million jobs added over the past 12 months

  14. After peaking in October 2009,the unemployment rate has fallen by3.4 percentage points

  15. The unemployment rate is forecast to edge lower

  16. The FOMC forecasts that the unemployment ratewill approach the natural rate towards the end of 2016 FOMC Central Tendency (December 2013) 2014 6.3 – 6.6 2015 5.8 – 6.1 2016 5.3 – 5.8 Longer run 5.2 – 5.8

  17. Inflation has moderated

  18. Adjusted for inflation, current oil prices are belowthe levels that existed thirty years ago

  19. Natural gas prices remain low

  20. Between 1994 and 2005 the natural gas to oil price ratio averaged 13.4% - it fell to average 3.8% in 2013

  21. Removing the volatile food and energy components from the PCE, “core” inflation remains low

  22. Inflation is forecast to rise 1.9 percent in 2014and 2.1 percent in 2015

  23. The FOMC anticipates that PCE inflationwill remain below two percent through 2016 FOMC Central Tendency (December 2013) 2014 1.4 – 1.6 2015 1.5 – 2.0 2016 1.7 – 2.0 Longer run 2.0

  24. The FOMC anticipates that “core” PCE inflationwill also remain below two percent through 2016 FOMC Central Tendency (December 2013) 2014 1.4 – 1.6 2015 1.6 – 2.0 2016 1.8 – 2.0

  25. Industrial output in manufacturing fell quite sharplyduring the recession, but has risen strongly overthe past fifty-four months, averaging 4.4% and hasrecovered 85.1% of the loss during the recession

  26. While manufacturing jobs have been rising,they have only recovered 27.1% of the jobslost during the downturn

  27. Industrial production is forecast to riseat a pace slightly above trend in 2014 and 2015

  28. After rising by 13% in 2012, vehicle sales rose 7% in 2013and are forecast to rise around 3% this year and next year

  29. Credit spread between Corporate High Yield securitiesand Corporate Aaa securities has remained low

  30. Monetary policy has been very aggressive,keeping the Fed Funds near zero since December 2008

  31. The Federal Funds Rate is anticipated to remainlow over the forecast horizon FOMC Midpoint Value (December 2013)

  32. The asset side of the Fed’s balance sheethas expanded in size and in composition

  33. The money supply (M2) is nearly 4 timesbigger than the monetary base

  34. The Fed’s expansion of the monetary base has allowed the money supply to continue rising,compared with what took place during the 1930s

  35. Summary • The outlook is for the U.S. economy to expand at a • pace somewhat above trend in 2014 • Employment is expected to rise moderately with the • unemployment rate edging lower • Slackness in the economy will lead to a relatively • contained inflation rate • Growth in manufacturing output should be somewhat above • trend this year

  36. www.chicagofed.org www.federalreserve.gov

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